THE retail, wholesale and manufacturing sectors serve as crucial pillars of Zimbabwe’s economy, driving employment, facilitating trade and significantly contributing to the country’s gross domestic product (GDP).
These sectors provide essential goods and services, form part of the national supply chain and support numerous small-scale businesses.
Retail and wholesale businesses act as intermediaries between manufacturers and consumers, ensuring that goods are distributed efficiently across the country.
They provide vital linkages in the supply chain, enabling producers to reach a broader market while ensuring consumers have access to essential products at competitive prices.
Wholesale businesses serve as key distributors for both formal and informal retailers, thus influencing market dynamics at multiple levels. They generate substantial government revenue through taxes and customs duties.
The decline of these sectors poses a significant risk to economic stability, social welfare and national development. However, recent economic disruptions have significantly weakened these industries, pushing many formal businesses to the brink of collapse.
One of the major setbacks for Zimbabwe’s economy in 2024 was the El Niño-induced drought, which also affected electricity supply to date. Zimbabwe’s ongoing electricity crisis has exacerbated challenges in the formal sector.
Power shortages have increased production costs, as manufacturers and retailers are forced to rely on expensive alternative energy sources such as diesel-powered generators.
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The high cost of fuel, combined with an erratic power supply, has led to disruptions in operations, negatively impacting productivity and profitability.
Many businesses now struggle to sustain operations, leading to a ripple effect of job losses and economic contraction.
Zimbabwe’s fiscal and monetary policies have further exacerbated challenges faced by the formal sector. The introduction of the Zimbabwe Gold (ZiG) currency has created significant distortions due to its dual existence alongside the United States dollar.
Retail and wholesale shops are required to accept the ZiG, but many suppliers price their goods in United States dollars (USD) or at a parallel market exchange rate.
This discrepancy leads to severe exchange rate losses for retailers, who must convert earnings from ZiG sales into USD to pay for imports and operational expenses. As a result, profit margins shrink, threatening the sustainability of formal businesses.
Zimbabwe’s tax regime places a significant burden on formal businesses, making it difficult for them to remain competitive. Retail and wholesale shops are required to comply with over 30 separate licensing costs, in addition to taxes such as the Intermediated Money Transfer Tax (IMTT) for electronic payments, Value Added Tax (VAT) and corporate tax.
These financial obligations increase the cost of doing business, forcing some businesses to either close or downsize. Meanwhile, the IMTT discourages electronic transactions, driving more economic activity into the informal sector, where cash transactions dominate and tax compliance is low.
At the policy level, inconsistent government regulations have created uncertainty for businesses. While some policies aim to curb informalisation, others inadvertently encourage it by imposing excessive regulatory demands on formal businesses, making it easier for informal traders to thrive.
The lack of a coherent strategy to balance regulation with business support has further aggravated the crisis.
Rise of informalisation
The rapid expansion of Zimbabwe’s informal sector has created an uneven playing field for formal retailers and wholesalers.
Informal traders operate outside the tax system and evade regulatory fees, allowing them to offer goods at lower prices than their formal counterparts.
This has led to a drastic reduction in market share for formal retailers, forcing many to shut down operations. Major retail chains such as N Richards, Spar Zimbabwe and Choppies have already closed some of their outlets, with others scaling down significantly.
The continued collapse of formal retail businesses poses serious risks to the broader economy. As retail chains close, thousands of workers lose their jobs, increasing poverty levels and social instability.
With fewer formal businesses, tax collection dwindles, affecting public service delivery. Local manufacturers lose key distribution channels, impacting production and economic growth.
Additionally, informal traders often sell smuggled or counterfeit goods, undermining local industries and eroding government tax revenue.
Govt response, shortcomings
The government has acknowledged the challenges posed by informalisation and has implemented several measures to formalise the sector.
These include reducing the VAT registration threshold, enforcing point-of-sale machines, and introducing a 5% withholding tax on unregistered micro, small and medium enterprises.
While the intent behind these policies is to increase tax compliance, they have not addressed the root causes of informalisation. The high cost of doing business, excessive regulatory burdens and exchange rate distortions continue to push businesses into the informal sector.
Furthermore, the government’s approach of enforcing tax compliance through penalties and stricter regulations risks discouraging small businesses from formalising. The government should instead be incentivising them.
The lack of clear incentives, such as tax breaks or financial support for newly-registered businesses, makes formalisation unattractive.
Additionally, the government’s emphasis on enforcement rather than structural reform fails to address systemic issues such as limited access to credit, unstable exchange rates, which has caused various pricing distortions and unreliable electricity supply.
Without addressing these core economic constraints, the formal sector will continue to shrink and informalisation will persist.
Policy recommendations
To prevent further deterioration of Zimbabwe’s retail, wholesale and manufacturing sectors, immediate policy interventions are needed:
- The government must create incentives for informal traders to register, comply with tax obligations, and operate within a regulated framework.
- Aligning the official exchange rate with market realities will prevent pricing distortions and reduce exchange rate losses for businesses.
- Streamlining licensing and compliance processes will alleviate pressure on formal businesses, making it easier to operate legally.
- The government should prioritise investment in stable power supply to reduce operational costs for manufacturers and retailers.
- Tax relief measures, affordable financing options, and targeted subsidies can help formal businesses recover from economic shocks.
- Encouraging businesses to adopt sound management practices and financial planning can improve resilience in times of economic distress.
Without swift and decisive action, the continued closure of formal retail businesses will have devastating consequences for Zimbabwe’s economy.
The government, in collaboration with the private sector, must implement urgent reforms to stabilise the retail, wholesale and manufacturing sectors.
Sustainable economic growth and long-term prosperity depend on a well-functioning formal sector supported by sound policies and a favourable business environment.
Zuze is an independent economic analyst. His areas of interest include informal sector, firm productivity, inequality and poverty. — [email protected]. These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe. — [email protected] or mobile: +263 772 382 852.
